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Consequences National Treasury Asking Parastatals To Give It Money – Two Economists Wehliye And Ndii Weigh In

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David Ndii (Left) and Mohamed Wehliye

Parastatals have been ordered to give money to the National Treasury. The move has dire consequences for the economy and survivival of some of those parastatals; even the country at large if you like.

According to two of Kenya’s best economists, David Ndii and Mohamed Wehliye, this shows that the government is dire straits than it has cared to admit in the past.

The Kenya Pipeline Company (KPC), Kenya Ports Authority (KPA) and other parastatals have already complied with the directive. Giving billions of their cash reserves to National Treasury. It was this week reported that the GoK had received half of what was required i.e Ksh33 bilion against Ksh78 billion that was targeted.

“We are happy with the progress and we expect to hit the target, A few days after making the announcement, we have received Sh33 billion. These funds will be injected into development projects in line with the Big Four agenda,” The National Treasury Cabinet Secretary Mr Ukur Yatani said on Sunday.

KPA gave the highest amount, Ksh18.7 billion as of Sunday.

Well, the two economists published a thread of the consequences of this action on Twitter and is shared below:

Threads

DAVID Ndii

1/6 So State House has ordered parastatals to hand over all their cash reserves, treasury bills/bonds and even A-in-A revenue (i.e what they earn in service fees) to the Treasury. What are the implications?

2/6 This is going to impair the cash flow of these corporations and in effect, operations and service delivery. The state corporations which have had their own resources will now have to depend on the notoriously unreliable and unpredictable exchequer releases.

3/6 While the memo suggests that some of this money will settle pending bills, far from solving the problem, it has now transferred it to parastatals whose suppliers will now be at the mercy of the exchequer. Expect some parastatals to default on their suppliers in coming days.

4/6 Because the key driver of the government’s financial crisis is foreign debt, part of the money confiscated from parastatals is going to pay the foreign debt. Instead of circulating in the economy it is going to China. Another body blow to an already battered economy.

5/6 The confiscation of t-bills/bonds is for all intents of purposes, a default action. It does not matter that these are state corporations, these debt instruments backed by law, and the government/debtor has suspended law. It’s a case of might is right, impunity.

6/6 When it gets more desperate as it will, what will stop it doing the same to other vulnerable investors eg. public pension funds? By resorting to such a draconian action, it has exposed that its more distressed than its been letting on. Expect investors to take note.

MOHAMED Wehliye

Another economist, Mohamed Wehliye, the Saudi-based Kenyan had this to say about the issue

1. GoK has instructed parastatals to transfer ownership of all the t-bonds they hold to GoK. Debtor asking Creditor to transfer all debt to it. This effectively = forced debt cancellation.

2. Some would ask – what is the problem? government borrowed from itself in the first place & that is now being reversed. Well, it is complicated.

3. You see, when parastatals bought these t-bonds, they paid GoK. So GoK has already spent this money. Kwisha, that money has been spent!

4. In the absence of a 3rd re discounter (market is illiquid), these t-bonds can only be rediscounted at CBK (the guarantor & lender of last resort of GoK)- meaning CBK (a GoK agent) will pay GoK for these t-bonds! This is akin to printing money – backdoor overdraft to GoK!

5. CBK would then have to go out & mop up all that liquidity from the market later. Fiscal patient spreading its disease to its monetary brother. Selling t-bonds not once but twice! Would like to see how this instruction would be implemented.

MORE:

  1. Why It Is Hard For The GoK To Pay Suppliers
  2. National Treasury Plans To Clear Outstanding Supplier Bills By Next Week

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